A company’s success is highly reliant on peer validation of investors decisions. This stunts diversity and must change if you want yourself as an entrepreneur to work on the biggest opportunities.
Say you’re an entrepreneur building something new and different, and you know you need capital. After pitching up and down you’ve finally found a believer. Someone who sees what you’re trying to do and thinks you and your colleagues are the team to do it.
Sadly,thats not the case. Get used to more of the same. You probably raised just enough to reach your next milestone but not enough to achieve self-sustaining profitability, which means you’ll be raising funds again soon. After all, on average, startups raise more than three rounds of funding. Maybe the investor is a true believer, and given how hard it was to convince others, they’ll sign up for the next round as well.
That happens rarely. In general, every round you raise has to be led by a new investor. Part of this is about the Kenyan shillings: Your seed-stage investor writes Ksh 5m cheque out of a 50 million fund, but your A-round investor writes 50–100 million cheque out of a 300 million fund. That seed investor will participate in the larger round but if they led the round, they’d burn through their fund too quickly and would be unable to lead enough investments to make their model work.
Thankfully, venture investors recognize the downsides of this and build deep networks of firms and individuals who frequently work together. There are even later-stage firms that specialize in following specific investors whose track record they trust. But while this pattern was developed for good reasons, it also has downsides that no amount of networking or help can compensate for.
First, of course, it means most CEOs spend a huge percentage of their time either directly raising money or doing the work necessary to do so later. You might not have wanted to become best friends with loads of investors, but if you’re taking venture capital, that’s your job now. Given that investors are professional meeting-takers, they’re available to meet for coffee any time, so this can be hugely time-consuming. Then, when it comes time to actually raise a round, you should expect that to consume your life for at least three months. And that’s if things go well.
If you’re one of the top companies, they’ll come to you, but if you’re not, it’s one more reason you have to work harder than the companies they love.  This all adds up to a massive tax on the companies that succeed, where CEOs become experts in fundraising rather than experts in building great companies, which is, of course, stupid. But it has a much worse impact on who and what can get funding in the first place.
Again, put yourself in the head of investors. You look at tens of potential investments a day, and you have far more opportunities than time or money, so you have your pick of what to invest in. Like with all funding patterns, it’s as much about the company as it is about the founder. It’s not just about who gets money; it’s also about what kinds of problems are worth solving and what kinds of customers make good markets.
In a world where you’re taking risks, where you’re actually focused on brilliant founders in big markets, those differences would be positives, they’d be signs you can do something groundbreaking. But when that world requires multiple rounds of belief, where failure at any round destroys your company, suddenly those differences become reasons for people to say no, for companies not to get funding and for founders not to get support.
Competition in new firms will change the behavior, and the returns, of the existing firms enough to make the difference, but what’s really going to shift behavior is when the companies these firms invest in start to deliver outsized returns specifically because they don’t fit the pattern.